A NON-TECHNICAL REVIEW OF QUALIFIED RETIREMENT PLAN LEGISLATION & ADMINISTRATIVE ISSUES

Plans must be tested each year to ensure that they are compliant with the laws governing retirement plans .

Winter 2024

To understand the testing performed for your plan , it may be helpful to review some of the terms that are commonly used . First , let ’ s examine how your plan ’ s noteworthy individuals are identified .

Highly Compensated Employees ( HCE ): There are two factors that determine which employees are HCEs for a plan year :

• Ownership : An employee who owns more than 5 % of the company in a plan year , or the year preceding it , is an HCE . A spouse , child , parent , or grandparent who participates in the plan will likewise be considered an HCE due to family attribution rules .

• Compensation : An employee is considered an HCE in a plan year based on their earnings the preceding year . An employee is an HCE for 2023 if they earned at least $ 135,000 in 2022 ; for 2024 , the employee must have earned at least $ 150,000 in 2023 . Plan document provisions may further limit this definition to the top 20 % of earners .

Key Employees : There are three factors that determine which employees are considered key employees :

• Ownership : An employee who owns more than 5 % of the company in a plan year , or the year preceding it , is a key employee . A spouse , child , parent , or grandparent who participates in the plan will likewise be considered a key employee .

• Owner compensation : An employee who owns more than 1 % of the company and earned more than $ 150,000 in the prior plan year is a key employee .

• Officer compensation : An officer of the company is considered key in a plan year based on their earnings the preceding year . In 2023 , the officer must have earned at least $ 200,000 in 2022 ; for 2024 , the officer must have earned at least $ 215,000 in 2023 .

Now that these individuals have been categorized , let ’ s explore some of tests that might be performed on your plan :

Deferral testing : The average deferral percentage for all highly compensated employees ( HCE ) is compared to the average deferral percentage for all non-highly compensated employees ( NHCE ) to ensure the gap between the two groups is not too wide . If this test fails , there are several methods to correct the test , including refunding deferrals and earnings for HCEs or making contributions for the NHCEs . This test is known as the Actual Deferral Percentage ( ADP ) test . Safe harbor 401 ( k ) plans are designed to pass the ADP test .

Match testing : This form of testing is similar to deferral testing but compares employer match instead of deferrals . This is known as the Actual Contribution Percentage ( ACP ) test . Safe harbor 401 ( k ) plans are also designed to pass the ACP test .

Maximum deferral testing : An employee ’ s deferrals cannot exceed a yearly maximum ; this limit was $ 22,500 for 2023 and will be $ 23,000 for 2024 . An additional $ 7,500 catch-up contribution can be deferred in 2023 and 2024 by participants who are at least 50 years old . If a participant has deferred more than the limit , a corrective distribution of the excess deferrals and earnings must be processed by April 15th . This limit is known as the 402 ( g ) limit .

BENEFIT INSIGHTS | WINTER 2024